Behind a partisan debate over tax-break 'inequities'

Whenever Congress considers tax legislation, one issue springs up that won't go away: the huge gap between the rich and poor in the United States.

Last week it was an element in the discussion of a bill to expand the tax breaks for 401(k)-type pension plans and individual retirement accounts.

The House passed the bill last Wednesday with 401 in favor, including 182 Democrats.

Similar legislation is expected to pass the Senate. If it escapes a presidential veto, it will provide $52 billion in tax breaks for millions of Americans over the next 10 years.

The current $2,000 contribution limit for both traditional and Roth IRAs would increase in steps to $5,000 by 2003 and then be indexed for inflation. The limit for those 50 and above would jump to $5,000 in 2001. For 401(k)-type plans, the limit on salary-reduction contributions would increase from $10,500 to $15,000 by 2005.

Great! Nothing like tax breaks in an election season.

Then along comes a Washington think tank, the Institute for Taxation and Economic Policy, which notes that 42 percent of the tax reductions would go to the most prosperous 5 percent of Americans, and a mere 4 percent to the bottom 60 percent.

Another Washington group, the Center on Budget and Policy Priorities (CBPP), adds that the provisions of the complex bill would not only benefit high-income executives, but "likely lead to reductions in pension coverage among low- and moderate-income workers and employees of small business."

That stings because top corporate executives, blessed by a hot stock market, have been getting compensation that on average is 400 times that of the lower-paid workers in their companies. It was "only" 40 times a decade ago.

Similar analyses show most of the benefits of estate-tax repeal going to heirs of the super-rich. That measure, just passed by Congress, faces a possible veto by President Clinton.

Even the marriage-tax penalty relief measure, passed by Congress last week, helps mostly the well-off. That body's Joint Committee on Taxation finds that 79 percent of the benefits would go to taxpayers with incomes above $100,000. Three-quarters of taxpayers with incomes below $75,000 would get just 21 percent of the relief. Mr. Clinton promises a veto, saying the bill's too costly.

To a considerable extent, the distorted distribution of tax benefits arises from the fact that the prosperous pay the bulk of income-tax revenues. The poor pay Social Security taxes, but not much income tax.

Upper-income households also have a greater share of total income than they did a decade ago.

Lawrence Kudlow, chief economist of ING Barings LLC, a New York investment house and a former Reagan administration official, argues that "class-warfare bashing of the rich" has lost its political potency. Repeal of the estate tax shows "the political clout of the new Investor Class, a group ... that is the invisible whip-hand of American politics today," he holds.

This group votes in large numbers and makes big campaign donations; the poor don't.

A Boston group, United for a Fair Economy, plans to keep in the spotlight the "connection" between campaign finances and income inequality.

UFE has launched a campaign spoof, Billionaires for Bush (or Gore), which promises to make a splash at the Republican convention in Philadelphia. This imagined "bipartisan coalition of super-rich donors" will hold a "Million Billionaire March" July 30 and a Vigil for Corporate Welfare July 31. The next day, participants will link arms around the Federal Reserve branch in Philadelphia to trumpet the Fed's policy of "keeping wages low to prop up stock prices."

Spokeswoman Betsy Leondar-Wright says the "gag is spreading like wildfire." But she also confesses that it's too early to know what sort of turnout of real protesters (not likely billionaires) will show up for the publicity-seeking, point-making lark.

Back to pensions:

Under present pension law, firms that provide executives with tax-advantaged pensions must do the same for lower-paid workers. In a speech last Tuesday, Treasury Secretary Lawrence Summers charged that the new bill undermines these "top-heavy and anti-discrimination safeguards."

One key sponsor, Rob Portman (R) of Ohio, denies the charge. Rather, his bill will expand coverage among the 70 million Americans lacking private pensions and add to pension portability when workers change jobs, he says.

The White House says it "strongly opposes" the bill. But whether President Clinton will veto it remains uncertain. The bill has the support of teachers' and building-trade unions - groups Democrats hope to please.

(c) Copyright 2000. The Christian Science Publishing Society

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